April 15, 2003
"Charity Begins at Schedule A"--A Commentary by Prof. Ian Ayres and Yale SOM Prof. Barry Nalebuff
(This essay was originally published in the April 15, 2003, edition of the New York Times.)
Charity Begins at Schedule A
By Ian Ayres, William K. Townsend Professor of Law, and Barry Nalebuff, Milton Steinbach Professor of Management at Yale School of Management
Most people think of today as tax day. But it is also an ideal moment to reflect on whether we've given enough to charity. Thanks to Schedule A, tax day is often the first time that we add up how much we've given and see how it stacks up against what we've earned over the year.
Two small changes in tax law could encourage people to be more generous. First, extend the deadline for deducting donations to April 15 of the following year, the same as the deadline for contributions to an Individual Retirement Account. Second, provide a new line on the tax form for people to total their donations as a percentage of their income.
Most of us teach our children to tip at least 15 percent. Yet we generally don't tell them how much they should give to charity. In fact, most people don't even know how much they themselves gave to charity.
Ask yourself this question: Are your contributions above or below average? Most people can't answer. First, they don't know what percentage of their income they donate, and second, they don't know what the national average is. Our informal survey of some of our students found that very few students had any idea what percentage of income their parents donated. The national average is 2 percent, but there is a huge variation, and many people with above-average incomes give virtually nothing.
If the explanation for this low level of charity is simply a lack of generosity, then there's no easy solution. But another cause, and one much easier to fix, is a lack of information -- and the corresponding lack of a social norm.
Once a social norm is established, behavior can change. Researchers have discovered that most students think they drink less than the average -- and thus increase their consumption to be more like others. Simply publicizing that few students had more than five drinks reduced peer pressure to binge. Rather than telling students to "Just say no," it was more effective to say, "Just be like everybody else." The I.R.S. could apply the same approach to charitable giving.
By requiring everyone to calculate their giving as a percentage of their income, the I.R.S. could solve the self-ignorance problem. Donations percentages, like tipping percentages, would be something that people know about themselves. Second, the 1040 instruction sheet could report the average contribution rate for different income levels. The I.R.S. already has this data. Indeed, this information is used by accountants and tax software for the purpose of assessing audit risk -- rather than allowing individuals to assess their generosity.
Of course, a comparison with the average percentage might induce some above-average givers to reduce their donations. But since the median contribution is far below the mean, the number of people who feel pressure to donate more will exceed those who might be tempted to give less.
Lastly, the I.R.S. should extend the deadline for charitable contributions the way it extends it for the I.R.A. contributions. A delayed deadline has worked well with regard to I.R.A. contributions. If taxpayers discover they haven't saved quite enough, they have a chance when they file to add to last year's I.R.A. This retroactive contribution also helps people reduce their tax liability. Seeing the immediate tax savings from donations would similarly encourage people to give to charity.
By letting taxpayers know more about their own giving and that of others, the I.R.S. would help define a national norm for charity. And by allowing taxpayers to deduct contributions until they file, it could encourage Americans to be more generous. After all, most of us are like residents of Lake Wobegon: we prefer to think of ourselves as above average.
Ian Ayres, professor at Yale Law School, and Barry Nalebuff, professor at Yale School of Management, are co-authors of the forthcoming book, "Why Not?"